Abstract
Continuous reaction function equilibria are studied in supergames in which the stage game resembles a standard duopoly game and the evaluation relations are according to the limit of the means. It is proven that “collusive”, i.e., single-period game non-Nash equilibrium, stationary outcomes are supported in subgame perfect equilibrium by linear reaction function pairs. Conversely, it is shown that linear reaction equilibria are, in essence, typical in the class of subgame perfect continuous reaction equilibria. Further, the multiple equilibrium problem of the Folk theorem is shown to be significantly diminished in restricting attention to subgame perfect linear reaction equilibria.
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